Global management consulting firm A.T. Kearney has predicted that there will be a significant increase in mergers and acquisitions (M&A) in the oil and gas sector for 2015 as a result of oil prices falling below US$50
According to its latest report, the intense pressure on prices has challenged cash flows and, therefore, oil companies needed to have a clear response to the situation — both near term but also long term. Companies are expected to respond with M&A to reshape the competitive landscape to their advantage.
M&A in oil and gas had showed a strong recovery in 2014 after a slow 2013, and with recent oil price decreases and OPEC’s decision not to cut output, 2015 is set to witness even further M&A activity across the value chain. These strategic deals would be the key to growing value and aiding companies to navigate market turbulence.
Richard Forrest, global lead Partner for the Energy Practice and co-author of the Oil & Gas M&A study at A.T. Kearney, said, “Strategic approaches to M&A are critical to address the intense cost and cash-flow pressures experienced by oil and gas players. Our analysis and discussions with industry executives revealed the likely onset of a new wave of mergers and acquisitions across the value chain in the next six to 12 months.
“The window of opportunity may be shorter than expected and will be driven by oil price expectations. Those companies with strong cash flow and healthy balance sheets will be able to leverage opportunities, while others will need to define strategies just to survive.”
The report added that all players in the industry could benefit from a strategic approach to M&A, including international oil companies (IOCs), national oil companies (NOCs), independent oil companies, service sector businesses and financial investors.
Jose Alberich, partner at A.T. Kearney Middle East, noted, “For Middle East players — NOCs, IOCs and oil majors operating in the region — there may be opportunities to strengthen their positions with strategic M&A deals. Attractive assets might struggle with the lower oil prices, and as they become distressed may turn into viable targets for larger players.
“However, lower oil prices may well mean less cash available to potential buyers, so any moves made will be very selective. All activity will be carefully considered, with NOCs reassessing strategies to ensure proactive moves fit their mandate and government objectives.”
The study said that for IOCs, optimising portfolios would continue to be the focus and divestment of downstream and non-core assets could accelerate to enable funding of targeted upstream activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are expected to be limited.
The study also determined that IOCs would favour selective acquisitions to build in their chosen areas and the M&A activity for NOCs would be aligned with the national agenda of their host government, which was often strongly influenced by near-term domestic needs and government agendas as much as by economic and business strategies.
The study also revealed that independent oil companies’ success in M&A would be determined by balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices. The more ‘adventurous’ financial investors may take the opportunity to enter the market; however, the current margin squeeze, low oil prices, and sluggish demand could suppress some investors’ appetites.
Financial investors were likely to acquire in the oilfield services sector, downstream divestments by IOCs, and for those with confidence, some upstream assets beyond the traditional mature production.
Oil service companies would continue to be hit hard as operator margins are squeezed and this is also expected to impact service providers. There is significant potential for consolidation and investors with capital to invest will continue to be active, plus new entrants such as large engineering companies could make strategic moves to enter the market.
Forrest noted, “Businesses with the foresight to take first-mover advantage can make significant strategic gains in what will be a very dynamic competitive landscape.”
